I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals.
My ideology can be summarized at least metaphorically by this quote:
"I have a total irreverence for anything connected with society except that which makes the roads safer, the beer stronger, the food cheaper and the old men and old women warmer in the winter and happier in the summer." - Brendan Behan
Nobody I work for has any responsibility for what goes into this blog and you should make no inference that they approve of it or even have read it.

I recently wrote a piece in this column showing why bankruptcy protections are essential for the healthy functioning of the nation’s federal and private student loan systems, and the public interest that they serve. Of the 50 or so comments received, very few challenged the validity of the argument or the soundness of its premises. Surprisingly, a significant proportion of the readers not only agreed with the piece, but actually called for more ambitious remedies, such as forgiving all student loan debt, adopting a free higher education model, and so forth. While these solutions merit serious attention, in this and other forums, I remain focused on the question before us, since private loan bankruptcy bills are in the House and Senate as we speak, and similar legislation for federal loans is expected in the near term. In this context, there were legitimate questions raised about the practical effects of returning bankruptcy protections to both private and federal loans, and so these are what compel this continued discussion.

There were essentially two concerns raised on this front. First were concerns that returning bankruptcy protections would allow widespread abuse of the system. The second concern was that bringing bankruptcy back would cause private lenders to tighten up their lending, and also cause the loans to be more expensive for the students. These two concerns have been used for years to stop this debate, and keep the lending system on its current, unsustainable trajectory. To be blunt, those dogs don’t hunt today, and really never did for that matter.

Here’s why: Alarmist predictions of widespread bankruptcy filings fly in the face of all available historical data. It is well established by John Pottow (U Mich) and others that when bankruptcy was allowable for all federal student loans, far less than 1% were ultimately discharged this way. One legislator who participated in the legislative process which first began restricting bankruptcy protections for student loans characterized it as a response to “a crisis only in the imagination”.

Like today’s “Pell Runners” (people who enroll in school only to abscond with Pell Grant proceeds), a vanishingly small number of citizens who acted in bad faith were pointed to by the lending industry, and a crisis was manufactured with the aid of the national media. This crisis served as political cover for removing bankruptcy protections from everyone, not just the handful of bad actors who actually deserved such a response. In hindsight, this was essentially a cheap trick (and I suspect the same gimmickry is being employed in the current Pell debate). The point, here, is that people never rushed out to file for expediency or convenience. It just didn’t happen.

Many will claim that the filing statistics I point to were during a different time, when the relative cost of college was far lower, and this is a valid point given current debt loads, a more cynical younger generation, etc.. But what they fail to acknowledge is that the increased pressure that today’s student debt loads might put on borrowers to file is more than balanced by today’s far more stringent bankruptcy laws compared to 40 years ago. Simply put, bankruptcy isn’t nearly the “walk away” option that it used to be. Bankruptcy filers who are gainfully employed (or even employed), usually are compelled to repay a significant portion of their debts by the court. So the widely perpetuated stereotype of people washing their hands of the debt, scott-free is a myth, and has been for years.

Also, the claim that young people today are less concerned about the negative implications of filing for bankruptcy than in previous generations is dubious at best. No one wants to file for bankruptcy, and in my experience I would say this holds particularly true for young adults fresh out of college, and full of optimism. This is another myth perpetuated by the lending industry- one which that plays upon the paternalism that naturally wells up in adults when discussing college related issues (I suspect, frankly, that this cynical characterization is more a reflection of the ethical shortcomings of those painting the picture than those who are being painted). Whatever the case, suffice it to say that bankruptcy is still as stigmatizing, embarrassing, and unpleasant today as it ever has been- the last, worst possible course of action to be forced into. No one would choose this if other options existed (options not involving public humiliation or usury, ideally).

And indeed, there are payment options for recent graduates that are clearly preferable to bankruptcy. The first option (obviously) is to get a good job/income stream and repay the debt quickly. Absent that course, there are two repayment programs in place which allow the student to repay a fairly low portion of his/her income over 20 years, or what is more attractive, 10 years if the student is employed at a non-profit or works in the public sector.

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Peter overlooks one important thing. Loans are loans, not gifts. Many of those students should never have taken out loans in the first place and the lenders should never have given them the money. A loan should be granted when there is a reasonable expectation of repayment. Too many students receive loans to study in fields where job prospects are dim and salary expectations are low. I blame the government for guaranteeing such dubious loans but to a much higher degree I blame the students themselves for taking out the loans – it is tantamount to accepting money under false pretenses. We should cap all student loans based on the employment and earning potential of the chosen field of study and should monitor academic progress during the period when there are no payments being made.

If you read the piece previous to this one, you will understand the particularly sinister nature of this lending system which clearly pre-empt the argument you make above.

But yes, I do agree that ultimately, if the government wishes to make loans for college (in the presence of bankruptcy protections, of course), significant underwriting of the colleges would be an obvious step to take.

I bet this A0110915 would also blame a rape victim for wearing a short skirt. Or the auto accident victim, because they unknowingly bought a lemon car.

WOW, talk about being in left field. Blaming the students for taking money under false pretenses? Who made the false pretenses? The government did, not the student.

Did anyone tell you, when you got your loan, that the government held a position that anyone who applies for a student loan is out to cheat the government? Did they tell you that? They didn’t me. I found out about it DURING the 1990-90 reform hearings, which were held some 5 years after I got my first loan. Did anyone tell you that the government took the position that what the school promised you and the loan contract, were 2 separate issues? They didn’t me. Did a Government certified representative of the government loan industry talk to you or help you process your loans? Not me. So who here was operating under false pretenses? I think its clear: the government.

No, I would not blame a rape or accident victim as you describe. But I do partly blame students for taking the money and opting for a college major that has very dim job prospects (or, in some cases, failing to study enough to stay in school). Sure, there are competent students who did the right thing and got caught by circumstances. But if you look at the numbers you can see what happened in a great many cases: a student borrowed more money than was justified. Why is nobody willing to accept even partial responsibility these days? “The bank made me buy a house I couldn’t afford.” “The credit card company made me spend more than I could pay back.” As I said originally, no one party is entirely to blame here, but no one party is entirely innocent either. We won’t solve a systemic problem by trying to pin it on a scapegoat. We have to fix the system.

People who overextend themselves on houses or consumer goods or ill conceived entrepeneurial ventures all have bankruptcy protection. An 18 year old who is encouraged by his teachers to pursue a liberal arts degree should probably have the same chance at a second chance.

I couldn’t agree more. Why do we forgive everyone but students? Some of the people that we allow to declare bankruptcy are much older than these young kids entering school, yet they still made poor decisions. Why wouldn’t we extend the same to students?

Kudos to Mr. Collinge, who’s been a voice crying out in the wilderness for many years now. Only he and people like Elizabeth Warren have had the guts to characterize our nation’s student-loan policies as usury. But how I wish people would start making a distinction between student-loan debt, as in, “principal plus interest”, and default PENALTIES! I know of no other commercial realm in which the penalties so far outstrip PPI. Where else would you encounter a 30% annual penalty, if not in the defaulted-federal-loan sphere? It’s patently illegal in any other undertaking. … While we’re on the subject, why not re-examine the egregious percentage of “loan debt” that is paid annually to collection agencies, so many of whom systematically harass borrowers? Various states’ attorneys general will readily identify the worst offenders. But apparently the latter, like Halliburton, continue to find ways of “making it work”. These agencies show nothing but contempt for our laws, and have been the catalyst for many a borrower’s despair — mine, for instance, and my spouse’s. Worse, the Government watchdogs who purportedly “oversee” their operations have grown far too cozy with them, last thing I knew. Why shouldn’t collection agencies’ incoming and outgoing calls be randomly monitored, as is the case with most servicers’? Why not emulate the IRS, requiring each staffer to give his or her ID number before opening or fielding a call? … Also, why — in this era of data analysis, text analytics, and search-engine optimization — does it remain so hard to find federally-generated information about one’s options for averting or coping with a student-loan default? So many people honestly can’t meet the boilerplate repayment schedules, no matter how severe they are with their budgets, or how hard they and their households try to generate extra income. … Meanwhile, most public schools resolve their budgets courtesy of adjunct faculty, “investing” an ever-larger share of their budgets in “administrative expertise”. For this, so many enterprising students are mortgaging their futures? (For those who don’t know, an adjunct is, essentially, a part-timer without benefits, someone who cobbles together assignments for years on end, typically without a raise, and with summers unemployed. Each new term’s schedule and courses are assigned after the tenured faculty, if you’re given work — and all for less than is paid to a rookie, nonunion sanitation worker.)

Yes, Mr. Reilly. However, the topic under consideration is student-loan issuance and repayment, not the credit-card industry. Credit-card firms can but aspire to the privileges accorded their brethren in the student-loan biz. That a borrower must be “permanently and totally disabled” to have a prayer of a student-loan discharge — under any and all circumstances — is rank insanity. And shame on Congress, then and now, for the student-loan stranglehold built into 1994′s Bankruptcy Act. I know some student-loan borrowers who have underpaid, or paid late; not one is the narcissist sleazeball portrayed by lobbyists and their Congressional cronies. Rather, those of my acquaintance who wrestle with student-loan debt have invariably headed the “hard-working American families” to whom Congress vows loyalty. Indeed, student lending’s draconian terms have never been legal in any other area of lending: that should tell us something. In fact, it should’ve been a red flag from the get-go.